As noted in our first Allstate Agency Value Index report, a downward trend in Allstate Agency values occurred for the first time in 2008, as Allstate Agencies proved themselves to be susceptible to the generally negative effects of the national credit crunch and the general uncertainty most Americans felt regarding the health of our U.S. economy.
Early indications show that 2009 may be a better year for Allstate Agency owners, as first quarter data hints at a reversal of negative trends in 2008.
Although there are reasons to believe that agency value will improve in 2009, time will tell whether the steep drop during the fourth quarter was anomalous and the first quarter of 2009 is merely a continuance of a gradual decline, or if agency values have indeed stabilized and begun to climb.
The most significant change in policy observed in the first quarter of 2009 was Allstate’s loosening of its restrictions regarding agency mergers in various states such as Nebraska, California, Florida and Pennsylvania. In fact, this allowance was extended to outside buyers and existing Allstate Agency owners. The observed effect of this policy change has been a willingness of buyers to offer more for individual books of business due to the significant economies realized through the merger and subsequent shedding of duplicative expenses (e.g., rent, staff, etc.).
A significant increase in the economic appeal for first-time buyers has also been observed, as they have been approved to acquire and subsequently merge two or more Allstate books into one location. Thus, acquisition offers from first-time buyers has been higher per agency than in the recent past. Their ability to secure financing has increased as well due to the aforementioned economies of scale.
A strong argument in favor of the rather anomalous nature of the fourth quarter 2008 Allstate Agency value indicators shown above is that many Allstate Agency owners interested in selling their books of business were more eager to do so quickly than in the past. A major reason for haste included concern for potential increases in the capital gains tax in 2009 associated with the change of presidential administrations (some predict that agencies sold in 2008 may receive more favorable tax treatment than those sold in 2009), and a continued general fear of a significant and swift change in the U.S. economy. As is the case in the sale of any asset of size and complexity, when the sale needs to occur quickly, price is one of several factors sacrificed.
Viewed over the long term, the present value for which Allstate Agencies are being sold remains strong relative to both Agency Renewal Commissions and Total Revenues. This continues to be a testament to the extremely strong historic earnings of Allstate Agencies and the relatively stable nature of their revenues. An additionally significant and interesting aspect of Allstate Agency value that can be observed in the long term historical agency sales data is the impact an Allstate Agency’s size has on its value relative to Renewal Commissions.
A new dynamic of the second edition Allstate Agency Value Index is the inclusion of Allstate Agency sales prices relative to Renewal Commissions (see chart below).
Based on Allstate Agency sales data accumulated over the last three plus years, it’s clear that size matters to buyers as those agencies with Renewal Commissions of $300,001 or greater sell for the largest multiple of commissions. In fact, the data shows that the commissions multiple decreases steadily in line with the decrease in the size of the Allstate Agency. Interestingly, agencies with Renewal Commissions in the range of $200,001 to $300,000 have been sold for a multiple, which is very much in line with national average multiple for Allstate Agency sales.
The reason this trend of higher multiples paid for larger revenues streams is found in the buyer’s “post-acquisition wallet.”
As seen in the comparative model shown above the same buyer will realize greater net personal earnings buying agency “B” even at a considerably higher multiple.